• The Fed expects US economic growth to accelerate, providing the incentive to begin tapering in September
• Ignis Rates team believes tapering will end earlier than consensus, with support ending in spring 2014, with the first Fed funds rate hike before the end of 2014
• The real 5y5y forward[—]

The Ignis Rates team expects global real forward rates (rates factoring in inflation) to continue to rise through the third quarter. The sharp rise in these yields during the second quarter was the dominant investment theme of the period.[—]

- Fed tapering is likely to act as a catalyst to spread-widening in Europe
– A reduction in the lower bound deposit rate is highly unlikely pre the German federal elections in September
– Negative interest rates could be introduced by December
– Any lasting solution requires re-profiling both debts [—]

We believe that tapering of the Fed’s enormous liquidity programme will begin by the September 18th Federal Open Market Committee (FOMC) meeting at the latest, and the process should be completed by March 2014. This will lead to inevitable speculation over the first rate hike.[—]

We believe that the depositor levies on Cyprus represent a fundamental change in European policy. The Troika have made it clear that the contribution of €5.8bn from depositors is non-negotiable but that it is up to Cyprus how these funds are raised.[—]

About Ignis Rates Views

The main author of this journal is Stuart Thomson, fund manager and economist for the Ignis Rates Team at Ignis Asset Management. The other members of the team are involved in forming the views represented here, and will also contribute postings from time to time. We hope you find the content interesting and welcome comments or questions. To find out more about Ignis and our fund range please visit the Ignis website.